Meet Michael Stolze

As assistant vice president of origination at SFC Energy Partners LP, Denver, Michael Stolze sources investments for the company’s $600-million private-equity fund. Closed in 2011, the fund follows the firm’s first, $400-million raise. Stolze also provides financial analysis of deals meeting the firm’s criteria and helps in structuring transactions.

Stolze grew up in St. Louis and attended the University of Notre Dame. After graduation, he joined Ernst & Young’s M&A advisory practice in Chicago, concentrating on private equity. He was introduced to the energy sector when he returned to school to earn his MBA from the University of Texas at Austin and during a year with an Austin-based equity research and investment-banking firm. Next came a stint with Northwestern Mutual Capital in Milwaukee, where he was a director working on energy deals up and down capital structures and across energy markets, from utilities to independent power producers to the midstream, service and E&P sectors.

Colorado’s outdoor lifestyle attracted Stolze and his wife, and eventually business trips to Denver brought him into contact with SFC, which he joined early in 2012. In a recent conversation, Stolze discussed private-equity trends and SFC’s approach to investing.

Investor How is it different working for a relatively small private-equity firm versus your years at the private-asset arm of Northwestern Mutual Life?

Stolze The types of investments we make are very different. Northwestern Mutual, which is a big institutional investor, takes smaller interests in larger entities. Here it’s the reverse—we’re taking controlling interests in smaller companies.

One of the other differences is that at Northwestern Mutual, because it is an insurance company, you have certain restrictions on the types of investments you can make. You sometimes have competing factors to consider, outside of just making the best investment decision in terms of returns. For example, how does changing your asset allocation impact the company’s credit rating? At SFC, we don’t have those competing forces—our mandate is to generate the best risk-adjusted returns, given that we are investing in equity securities in small energy companies.

Investor What does SFC look for?

Stolze We are very measured and take our time analyzing deals. We have a long-term horizon that allows us to be patient. We are exclusively focused on onshore North American E&P, earlier-stage opportunities. We’ll look at deals in the $25 million- to $100-million range.

We can also bring to the table various co-investors to increase transaction size for the right opportunity. But you won’t see us involved as part of a consortium in a $500-million transaction. We want to maintain control over the board and operations. All our investments for the past three and a half years have been oil and liquids-focusedwe’ve had that bias since early 2009, when we saw what was happening with the shale-gas plays in the mid-to late 2000s. SFC made a strategic move to avoid putting new money to work in gas deals, and it’s served us well. Also, we don’t use leverage. Our entities are debt free.

Investor What has the recent fund invested in to date?

Stolze There are two new portfolio companies in the second fund so far, but one, Exl II, is a second backing of a management team from our first fund. Based in Midland, it is continuing to develop assets in the Permian

Basin’s Wolfbone play. The second, Calgary-based Tuzo Energy Corp., closed a $50-million financing with SFC in late 2011. It is focused on developing the Cretaceous Second White Specks light-oil resource play in Alberta and is just drilling its first well.

Investor How has the private-equity landscape changed in recent years?

Stolze With high oil prices and the energy sector being one of the few bright spots in a low-GDP-growth environment, investors that haven’t historically focused on energy have begun making a bigger push into the sector. Larger private-equity firms like KKR and Apollo are focusing more assets and resources on the sector. Their entrance has stepped up competition for assets.

Investor You’ve stayed away from natural gas. What’s your outlook for the commodity, and for oil?

Stolze We’re still pretty bearish on the outlook for natural gas. Is $2 or $2.50 the right number? Probably not, but when will it snap back, how quickly, and how much upside is there? We think gas prices will be depressed for quite some time.

For oil, the supply and demand scenario is much better. However, with the recent pullback in oil prices, some capital budgets may be impacted. There are some plays that don’t work at $75 oil, for example. There’s going to be short-term volatility, but longer term, we think factors such as China’s growth, emerging markets’ demand and the significant amount of resource in higher-cost areas will support higher oil prices. Thus, we’re much more bullish on oil.

Investor What made you gravitate to energy?

Stolze It’s a couple of things…first, I like its entrepreneurial nature. Second, I’m a numbers guy. This industry requires a combination of analysis and ability with numbers—you need to be able to understand the numbers and assess them quickly to make decisions